Okay, so George owes $200 to the telephone company for his April telephone bill.
j) Now George Burnham pays the amount owing to the telephone company on the 13th of May.
Again the easiest part of this transaction is the cash component. Cash of $200 is definitely paid. So bank goes down.
But what happens with our creditor? Our creditor (liability) exists currently in our records at $200. If we are now paying the telephone company, does this mean that we owe them less, or more, or that there is no change?
Answer: We owe them less.
In fact, we don’t owe them anything now.
So we decrease our bank by $200, and we decrease our creditors by the same figure.
George’s Catering now consists of assets of $30,800, made up of baking equipment to the value of $12,000 and $18,800 cash.
Note that the creditor now amounts to zero – in other words, we are showing that the debt towards the telephone company no longer exists.
Also note that the telephone expense did not result in cash leaving the business straight away. Cash did indeed leave the business (as it should if you have an expense), but only after a little while.
Let's take a look at one more example...
k)George sees that he has quite a bit of spare cash, and so decides to pay back most of the loan from the bank. He writes out a check for $4,000. What happens to our equation?
The answer is identical to what happens when we pay off a creditor (as in the first example above), in that both our bank as well as the liability are going to decrease. Obviously the only difference is that this time our loanwill decrease, not the creditor.
George’s Catering now consists of assets of $26,800, made up of baking equipment to the value of $12,000, and $14,800 bank.
The liability to the bank has decreased from $5,000 to $1,000.
Okay, well that brings us to the end of our section on Basic Accounting Transactions. Well done! You should have now studied all the different types of transactions that can occur in accounting!
Yes, that's right, the ten or so transactions we've covered is all there is! Well, all there is in terms of transactions. There's a bit more to accounting as a whole than just that (sorry :)).
Remember how we said that accounting is a system of recording information about a business?
Well, our next section is going to teach you the double-entry system of accounting, a system used for hundreds of years and still used today to record transactions.
Yes, we're going to venture into the world of debits and credits, probably the number one source of stress in an accounting student's life. You may have heard of these terrible things before. Let me assure you, they are far safer than many of the most terrible monsters out there. And to be perfectly honest, they're pretty harmless. They just look kind of mean sometimes when you start, but once you give them a little bit of attention, they usually warm up to you, and very soon you find they're just debits and credits, a simple system dreamed up to make recording things a little quicker and easier.
Okay, well let me not keep you any longer. Or scare you away.
Bottom line: if you feel comfortable at this point, move along to the next section, Double Entry Accounting.
Remember, if you're a little confused, take your time and review earlier examples. If you get these basics now it'll save you a lot of time later on - so check out the lessons you didn't feel totally cool about. Go over them 'til you feel cool. When you're happy with those lessons, move on.
Well done for getting this far... Let's go all the way!
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